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Asian Banking Sector Can’t Escape the Euro Zone Fallout

Heavy exposure to European banks leaves Asian banks in a tricky position as the European crisis continues.

The deleveraging of European banks in the coming years may significantly affect Asia’s banking sector, especially as the export-reliant region slows down in growth, experts from Standard & Poor’s say.

European banks have the largest presence among foreign banks in the Asia-Pacific region, with total exposure of $841 billion as of December 2011, making up 4.3 percent of the total gross domestic product of the region, according to the ratings agency.

“Asians worry about slowing growth, but Europeans worry about no growth or very low growth,” Douglas Peterson, president of Standard & Poor’s Ratings Services, said during a discussion group held at the Asian Development Bank summit in Manila, Philippines recently. “Without a doubt the economic situation we are facing is very worrisome. There is going to be a lasting impact from the euro zone crisis on Asia.”

From June to September 2001, EU banks’ total exposure in Asia-Pacific declined 10.1 percent, on the back of higher funding costs and tighter liquidity, in particular for U.S. dollar funding, and the introduction of stricter Basel 2.5 standards, according to S&P.

European banks will have to undergo deleveraging of up to $2.6 trillion globally in the coming two years, Peterson says, citing estimates from the International Monetary Fund.

According to the S&P, EU banks’ lending and underwriting exposures vary across markets in Asia, with Hong Kong and Singapore having the highest concentration: In Hong Kong, European bank lending makes up 138.7 percent of the GDP, while in Singapore European bank lending makes up 63.4 percent of the GDP. Markets that have the least exposure are China and Thailand, where European lending constitutes 3.9 percent and 5.9 percent of the GDP respectively.

“Generally, European banks have limited market shares in local-currency denominated lending,” according to a recent S&P report on euro zone risks impacting Asia. “However, they hold high market shares in foreign-currency denominated loans, trade finance, and syndicated loans. In addition, they are big players in derivative transactions. Therefore, the retreat of European banks could have a larger impact on credit availability in international financial centers, such as Hong Kong, Singapore and Tokyo, than in other Asia-Pacific countries.”

Asian banks can fill the gap, but still lack the skill set of European banks, says Singapore-based Ritesh Maheshwari, S&P’s head of financial institution ratings in the Asia Pacific. “Australian banks and Korean banks have some capacity, but Asian banks still lack capacity to fill the gap,” he says.

Gilles Plante, the Asia chief executive officer of Melbourne-based ANZ Bank, says he sees the retreat of European banks as an opportunity. “I believe we are very well equipped to provide financing,” he says in Manila. “The financial system in Asia is well capitalized, very liquid and overall well regulated.

“But in the longer term, there may be some impact on project finance and trade finance,” Plante says. “But I don’t agree with the notion that Asian banks don’t have the skills. Asian banks can still go and buy skills in the market. We see tremendous growth ahead. Timing is everything. I believe we will see Asian banks taking up the slack left by retreating EU banks.”

Yu Tsung Chang, the Tokyo-based head of S&P in Asia, says he sees many Asian banks expanding organically, while some are expanding by buying bits and pieces of retreating EU banks.

Yu cites Japan’s Sumitomo Mitsui Banking Corp.’s willingness to pay $7.3 billion to acquire the aviation finance arm of Royal Bank of Scotland Group in January as a recent example. “I also see Chinese banks expanding, taking a bigger role than before,” he says. “Many Asian banks will be expanding to fill the gap.”

Asian banks already have been buying up European financial assets since the global financial crisis began. Singapore’s Overseas Chinese Banking Corp. spent $1.5 billion in 2009 acquiring the Asia private banking operations of ING Group, which also sold its Taiwanese insurance unit to Taiwan’s Fubon Financial Holdings for $600 million the previous year.

Gerard Lyons, chief economist for London-based Standard Chartered Bank, says Chinese banks — which so far have not gone on a spending spree — have the biggest potential to fill the gaps left by retreating European banks in the years ahead. 

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